Saturday, June 11, 2016

How to Reconcile Peak Profit Margins And The Race To The Bottom

One of the conundrums of the current landscape is the fact that overall profit margins, although coming off the record levels of a couple years ago, are historically elevated at the same time vast swaths of the economy have to run faster just to stay in place.

This piece and the embedded links give some clues as to what's going on.

A little snippet from Citi’s equity telecom analysts earlier this week via a note entitled “Will telecoms ultimately disrupt their own industry model?”. It pertains to the upcoming release of the IDATE Digiworld Yearbook on June 14:

The two leading, but also opposing, economic forces,
which drive digital industries are: (a) benefits of size and network
effects; and (b) disruptive innovation. This, according to the authors,
leads to two paradoxically convergent potential outcomes: (1) dominance
by the leading platforms, which enables their owners to generate
significant value and cash flows or (2) economy based on sharing and
collaboration.

The authors see both outcomes as potentially fundamental threats to capitalism.

he book also discusses potential industry responses in a form of four
possible scenarios for the digital economy in 2025: (i)
customer-centric Mall Scenario, (ii) techno-centric Open Scenario, (iii)
trust-centric Trust Scenario; and (iv) price-centric Automated
Scenario. The above-mentioned dilemma in our view highlights the
scale of strategic uncertainties currently faced by the telecoms, as
well as the essential role policymakers will continue to play in shaping
the industry over a long-term.

The view ties in with Jaron Lanier’s thesis
about how businesses based on digital network effects tend to encourage
monopolism and a winner-takes-all framework. This inevitably erodes the
freedoms and wealth of the middle and cultural classes by undermining
the very protections (what might also be called culturally-favoured
inefficiencies) that had hitherto guarded their capacity to earn a
consumer surplus. In the long run, a new type of feudalism is brought
about, wherein the average person’s quality of life becomes entirely
dictated by the whims and desires of digital tycoons.

But unlike the old feudalism, where it was in the interests of the
lords to pass prosperity back to the dependent serfs to keep them on
side, content, compliant and not rebelling, no such interests exist for
the digital elite. The new lords can retreat to their mansions without
ever having to interact with their dependents, and without ever hearing
out their concerns, troubles or wants. There is no court system. There
is no empathy. Digitised complaints instead are dealt with algorithmic
courtiers programmed to get rid of the problem makers as cheaply as
possible....MORE